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S&P Could Drift Higher As Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 15, 2021.

We’ve noted in the previous Market Outlook that: “the fact that Money Flow measure hovers below the zero line as S&P fast approaching key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.”  As anticipated, stocks closed mixed Friday as tech cut some losses to close above the lows of the day even as U.S. rates climbed to pre-pandemic levels, while the reflation trade continued to boost cyclical stocks.  For the day, the S&P rose 0.10 percent to 3,943.34.  The Dow Jones Industrial Average rose 0.90 percent to 32,778.64 and the Nasdaq Composite was down 0.59 percent, but had been down about 2 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to 20.69.

Cyclicals, which move in tandem with the economy, continued to ride the wave of economic optimism, led by gains in financials and industrials, with the latter boosted by Boeing (BA) and Caterpillar (CAT).   Boeing received an order for 24 737 Max 7 jets from private equity firm 8888 partners, which has a stake in Canadian low-cost carrier Flair Airlines.  As such, the Industrial Select Sector SPDR Fund (XLI) rose 1.34 percent on the day and is up more than 9 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI has been on a tear in recent days after breaking out above the late 2020 sideways trading range, which represented the digestion period in the aftermath of the spring 2020 rally.  The overall technical backdrop remains supportive of further upside follow-through.  This increases the probability for a rapid advance toward the 104 zone, or the 127.2% Fibonacci extension.

XLI has support near 88.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed March 9, 2021 from bearish (sell) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P continues basing sideways using the lower boundary of the pink band as support after climbed above that level last week. Money Flow measure is above the zero line, indicating a positive net demand for stock. This is a bullish development, suggesting that the path with least resistance remains to the upside.

Traders however, must be mindful that the S&P is fast approaching the lower boundary of the red band, or extreme overbought zone, following recent advance.  The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 4000 before a significant pullback unfolds.

As for support, S&P must holds above 3900 on a closing basis to prevent a test of the more important support at the 3800 zone.

Short-term trading range: 3900 to 4000.  S&P has support around 3900.  A failure to hold above that level has measured move to around 3840.  Resistance is around 4000.  A sustain advance above that level has measured move to 4040.

Long-term trading range: 3300 to 4300.  S&P has support near 3600.  A failure to hold above that level has measured move to 3300.  The index has resistance near 4000.  A close above that level has measured move to 4300.

In summary, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 4000 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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